Transcript of "Basics Of Channel Management"

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Management Science II Dr. S.Bharadwaj MODULE 1 Distribution And Channel Management Agenda • Background • Marketing Channels • Functions of Marketing Channels • Types of Channels • Factors affecting Channel Decisions • Channel Conflict • Summary Background • Distribution is a key external resource • Logistics, Distribution and Channels Management are the less visible side of marketing • the less “sexier” side when compared to something like advertising • Nevertheless, it is as important, if not more • India has millions of outlets • Poor roads • Distributing in Rural India is very, very hard • Still, has to be done • HLL is excellent at this • The Post Office is good too • SBI is very strong here • Not so the PDS • Plus the increase in malls and large stores is a very big change in the making • It is also very difficult • imagine you are Nike 1Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj • you produce your shoes in Indonesia/China • you have to make your product available in Russia, India, Latin America, Europe, USA - in short, the whole world • It is thus mindblowingly complex • More so in India, why? Marketing Channels • The Network of partners in the value chain that cooperate to bring products from producers to ultimate consumers • Imagine Nike again • All those who help in bringing shoes to the consumer from the factories (or is it sweatshops ?) in Indonesia are the channel members (except transporters) • These include wholesalers, retailers, agents, brokers etc • They are called intermediaries, middlemen, dealers, resellers or distributors • However, the prevailing view is that channel members are more than just middlemen • They are comrade-in-arms • They are marketer’s first customers and partners; they add value to the marketer’s offer • What are some functions that channel members perform? 2Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj Functions of Channel Members Making Products Available • This is the most obvious and first function • Retailers are critical here • As also wholesalers in rural marketsInformation • Retailers are a great source of information • Why is this so? • What makes the retailer good here? • The retailer is closest to the consumer • Hence knows more than you, the marketer • Which models are liked? Which models are moving fast, slow and so on? • Also very useful for certain institutional purchases like hotels for tilesPromotion • Channel members also indulge in sales promotion and advertising • Deals, flyers, cooperative advertising Transfer of Title • If ITC sells 100 packets of Aashirwad aata to Nilgiris, the title is now transferred • Ownership is transferred Physical possession • Thus “your” goods are now possessed by Nilgiris • Imagine what would happen if retailers did not take physical possession? Financing • Now that Nilgiris owns it, they need to finance the inventory • Inventory always has carrying costs 3Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj Risk Taking • Now the onus is on Nilgiris to sell • What if they are unable to sell? • They are stuck with the product • Hence perishables always carry a large margin e.g. vegetables • What are some other risks? • What if a kid breaks some bottles of jam in the store and nobody notices? • What if there is a sudden cyclone and no one shops? • What about loss due to pilferage and theft? • This is a very big problem internationally since people get a kick out of this • Hence, Walmart says “RFID or else, bye” • Hence, several risks are assumed and you need to be thankful Negotiation • When does the retailer help here? • In case of institutional purchases again • Think of the hotel-tile example • Repeated follow-up and negotiation is done here by the retailer Value-Added Services • Like servicing cars, bikes • Like home delivery • Important in a country like India • Thus, several functions are performed by the channel member • Hence, more than merely a “dealer” • Hence, relationship marketing is very important 4Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj • Maintaining a good relationship is therefore highly important • Especially for the value-added services Types Of Channel Members Agents/Brokers • Channel partners that match marketers with wholesalers or in organization markets, with customers • They are very important for international marketing, for exports • Think of the success of Ebay, Placement Consultants, Online dating/Matrimonial sites • In a way, all are brokers Wholesalers • A wholesaler is someone who primarily sells to other retailers • Also may retail on own • Typically, buys in bulk • Very important in rural India • Companies think of him a necessary evil Retailer • The most visible face of the distribution system • India has the largest number of retailers in the world • Hence, the reluctance of the Govt in allowing FDI here – fear of unemployment Value-added reseller • channel partners that buy products from marketers, add value by modifying or enhancing value, then reselling them • Example would be? 5Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj Types of Channel Members • Vehicle dealer adds several accessories • Used car dealers make the car new once more Four Channels Through which marketers can reach customers Manufacturer Manufacturer Manufacturer Manufacturer Agent Wholesaler Wholesaler Retailer Retailer Retailer Customer Customer Customer Customer Some Other Forms • For Example, Multilevel Marketing - this is followed by companies like Amway, Tupperware • Here, Amway sells to independent distributors, who sell to still others and so on • There is a sort of a “chain effect” • Marketers are free to use more than one channel, they can use multiple forms of channels • This is called Dual Distribution or Hybrid Distribution • this involves the use of more than type of channel to sell to different customer segments • the furniture industry 6Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj • think of Michelin selling tires to Ford and to you - different channels • Sometimes, even to the same types of customers, different channels are used • for example, Coke is available in stores, movie theaters, video rentals and through vending machines • Then there are Strategic Channel Alliances • The use of another marketer’s channel arrangement to reach end customers • In the International market, this is common • Spic Fine Chemicals used Union Carbide’s Types of Distribution • Exclusive Distribution • a channel design through which products are marketed through a few carefully selected partners • luxury products, premium brands • Armani suits, Louis Vutton, • the idea is create exclusivity • if it is available everywhere, what is so exclusive about your product? • Factors Affecting Channel Decisions • What are some factors affecting channel decisions like • What type of channels do we have ? Online or offline? • A retailer only ? A wholesaler, then retailer and so on ? Channel length? • What affects these decisions ? What are the criteria influencing these decisions? 7Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj Type of Product • industrial products will have a different type of distribution from a consumer product • a consumer durable will have a different type of distribution from an FMCG product • product positioning too will affect type of channel • premium products will have a shorter channel Type of Customer • the same product when sold to an end or organizational customer will have different channels • for instance, computers will be sold direct to organizations but through resellers to end customers Market Environment • While in Rome, do what the Romans do • do what is the industry norm • if books are sold through exclusive book stores, do the same • however, this also gives an opportunity to differentiate yourself • Amazon.com going online • Level of risk involved in high, hindsight is always 20/20 Internal Considerations • do I have enough money to add another channel member ? • is it compatible with my other businesses ? • will any change cause more problems than solutions ? • for example, IBM, Compaq threatened by Dell 8Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj • Is it compatible with my business model e.g. Dell in China these internal considerations have a bearing on type of channel Legal Considerations • a manufacturer cannot insist that they sell their own products only (unless in case of a franchisee) • a manufacturer cannot tie the sale of certain goods to certain others • “you buy 100 crates of Vanilla Coke, if you want 500 crates of Coke” • I am sure, though, that this is happening • Cost and Profit Considerations • a low profit margin, high volume company will have many channel members • a high profit margin, low volume member will have only a few members Channel Conflict • This is defined as tension/clashes between channel members as a result of perceived unfairness • vertical conflict arises when there is a clash of interests between members at 2 different levels (like wholesaler and retailer) • horizontal conflict is between members at the same level - Retailer A Vs. Retailer B • conflict can be caused by unfair manufacturer policies, a few “rotten” apples, partisanship etc • conflict can be potentially dangerous and can snowball • McDonald’s franchisees for instance; if care is not taken, the grumbles might become a roar • however, a little conflict is good • manufacturers must be fair 9Indian Institute of Technology Madras

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Management Science II Dr. S.Bharadwaj Summary • Distribution is highly important • Especially in consumer products • More so in countries such as ours • Managing channels is part of a salesperson’s job • Conflict must never be allowed to get out of hand 10Indian Institute of Technology Madras